The Persistence of Financial Distress

Athreya, Kartik B.; Mustre-del-Rio, Jose; Sanchez, Juan M.

doi:10.20955/wp.2017.038

Working Paper

The Persistence of Financial Distress

Abstract: Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble. Roughly 10% of consumers are distressed for more than a quarter of the life cycle, and less than 10% of borrowers account for half of all distress events. These facts can be largely accounted for in a straightforward extension of a workhorse model of defaultable debt that accommodates a simple form of heterogeneity in time preference but not otherwise.

Keywords: Default; financial distress; consumer credit; credit card debt;

JEL Classification: D60; E21; E44;

https://doi.org/10.20955/wp.2017.038